The firm reported an EBIT of $1 billion on revenues of $15 billion last year. · These earnings were after research and development expenses of $1 billion. · You have capitalized research expenses, using a 5-year amortizable life, and estimated a value for the research asset of $3 billion, and amortization of $600 million on this asset for last year. · Last year, the firm had capital expenditures of $800 million and depreciation of $500 million. · There are no working capital requirements. · The book equity at the beginning of the year was $5 billion and the book debt was $1 billion. · The firm has operating lease commitments of $1 billion each year for the next 5 years and none thereafter. · The beta for the stock is 1.2. The pre-tax cost of debt is 7%, the risk-free rate is 6% and the market risk premium is 4%. The current market debt-to-value ratio is 20%. · The tax rate for the firm is 40%.

a. Estimate the firm’s after-tax operating income, adjusted for both R&D expenses and operating leases.

b. Estimate the book value of capital at this firm, adjusted for R&D expenses and operating leases.

c. Estimate the reinvestment rate at this firm, adjusted for R&D expenses and operating leases.

d. Estimate the economic value added by this firm last year, using the operating income and book value of capital, adjusted for R&D expenses and operating leases.
 

Answer rating: 100% (QA)

ANSWER A Begin with the reported operating income EBIT Then add the current years operating lease expense and subtract the depreciation on the leased asset to arrive at adjusted operating income Final... View the full answer